Why Pakistan might not be ‘blacklisted’ this time by FATF

Anwar H. Shaik
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As things stand now, Pakistan is in the 'Ongoing Process Statement', according to the FATF website updated as of October 2019.

When Pakistan comes up for review at the next Financial Action Task Force (FATF) Plenary in Paris during February 16-21, 2020, contrary to general perception, it's not likely to be 'blacklisted'.

Technically speaking, there is no such thing as 'blacklisting' in the FATF functioning. Nevertheless, with Pakistan hardly doing anything about it aiding terror groups, imposition of sanctions by its members could be the logical way to go about. But, that too, may not happen as Pakistan may benefit from certain frailties —and India should be wary of that.

Before going further, here’s a quick glance at the nature, functions and powers of FATF would help in comprehending how Pakistan may slip through.

FACTS & REALITIES

FATF sets standards known as 'FATF Recommendations' to combat money laundering, terrorist financing and other threats faced by the international financial system. It then evaluates and encourages countries to match their institutional mechanisms to its 40 recommendations by amending and enacting relevant laws for compliance.

The reality is that most countries don't match up to all its requirements. That's because each has a different legal, regulatory and administrative mechanism to deal with money laundering and terror financing. Hence, almost all these countries, after evaluations, are immediately put on a follow-up process, and reviewed periodically. If the deficiencies are acute or if they don't make progress, the countries are brought under a watchlist.

Depending on the risks they pose to the international financial systems, they are put under three different lists. The 'Ongoing Process Statement' contains list of countries that fail to make progress even after a sufficient number of follow-ups. They have, however, given a political commitment to an action plan with timelines and milestones. These countries, however, risk being moved to the next list called the 'Public Statement' only when they fail to make sufficient and timely progress as per the plan. The Public Statements are of two types and they are often misquoted as 'Grey List' and 'Black List'. Further, even the Ongoing Process Statement and the first of the Public statements are often used synonymously as 'Grey List'.

In the first instance, the FATF cautions on any transaction with such a country and calls to apply enhanced due diligence as it poses a risk not only to the dealing country but also to the overall international financial system. When the identified countries do not make any progress even after being named in the first Public Statement—Iran is the only country in this list, then the countries can be moved to the second and final list of the Public Statement wherein the FATF asks the members and non-members alike to impose counter-measures (or sanctions) on the country of concern. North Korea is the lone country in the latter list.

It should be noted that FATF lacks the required teeth to enforce sanctions. It's only a taskforce and isn't born out of any international treaty that could make its measures binding on member countries. It also doesn't have any permanent institutional setup.

Nevertheless, the argument usually is that the threat of naming and shaming associated with a Public Statement is more effective than the actual sanctions themselves. But that need not be true for Pakistan.

THE PAKISTAN CONUNDRUM

As things stand now, Pakistan is in the 'Ongoing Process Statement'—along with 11 other countries, according to the FATF website updated as of October 2019. It's anybody's guess as to what progress Pakistan has made in combatting terror and terror financing. Still, there's a likelihood of it escaping the ignominy of a Public Statement when it comes for its February 2020 review. That's because Pakistan has an agreed action plan backed by a political commitment.

The very act of remaining engaged with FATF in the monitoring and follow-up process earns it brownie points—unlike an Iran or North Korea. When Pakistan was originally evaluated in 2009, it was for technical compliance, but the evaluation criterion changed to include effectiveness in 2013, hence FATF might be considerate of this fact too.

Let's assume, on the other hand, that FATF is unsatisfied with Pakistan's progress. Then, the next step would be to apply 'enhanced due diligence' by countries dealing with Pakistan than taking it to the final level of imposing 'sanctions'.

Also, a mere FATF Public Statement without a sanction need not be a big deal. After all, as of February 2019, FATF had reviewed 81 countries and publicly identified 69 of them for deficiencies. Of these, 44 have been removed from the list on account of undertaking reforms. At some point both Israel and Russian were identified in the Public Statement.

While in theory, FATF can jump to the level of sanction, the global geopolitical realities indicate that countries like the US will have to pressure in that direction stating a compelling reason. Such an unprecedented move was already done in bringing Pakistan back to FATF monitoring from the regional level in 2018. Pakistan had earlier been released from FATF review in February 2015 with a condition that further progress will be monitored by its regional body Asia Pacific Group, especially implementation of UNSCR 1267.

This resolution related to freezing assets of and arresting the UN-designated terrorists — Lashkar-e-Taiba founder Hafiz Saeed, Jaish-e-Mohammad founder Maulana Masood Azhar and so on. When Pakistan continued to violate the UN resolution, India had upped the ante for violation of FATF recommendations 36-40. And, with the US' support, was able to bring Pakistan back to FATF monitoring.

So, India should again build alliances and force FATF to issue not just a Public Statement but one with sanctions too. Sanctions or a threat thereof could extract more compliance. A mere Public Statement calling only for enhanced due diligence will not impact a belligerent Pakistan.

The threat of a Public Statement did earlier force Pakistan to house arrest Hafeez Saeed, the Mumbai terror attack mastermind, on January 31, 2018—days before the February 2018 FATF Plenary. More is needed now. That said, the crucial point is that FAFT remains constantly engaged with Pakistan in combating terror financing and money laundering. This is very critical for India and from a global standpoint as well, and shouldn't be overlooked.

(The author works in the Department of Economic Affairs, Ministry of Finance as Director. Views are personal.)